Why the Coronavirus Oil Crash is Good

Update 3/11/20 OilPrice: As a result, the immediate victim will be U.S. shale. “[O]il should bottom out when producers begin physically shutting in wells, which is indeed what set the floor four years ago,” the investment bank added.

The carbon bubble is a hypothesized bubble in the valuation of companies dependent on fossil-fuel-based energy production, because the true costs of carbon dioxide in intensifying global warming are not yet taken into account in a company’s stock market valuation.

It has been postulated that advances in clean energy will create the condition for a financial crisis, when fossil fuel related assets worth trillions loose their worth. Still today, the most valued stock market companies are also the fossil fuel companies.

The study scenario which suggests that changes to our energy usage will result in plunging stock prices, bursting the carbon bubble, investments therein, is now actually happening, even though not because of shifting energy dependencies.

MarketWatch: The plunge for oil comes after U.S. and international oil grades are down by at least 35% from their recent peaks and are in a bear market that has put energy-related companies on their heels.

“We believe the OPEC and Russia oil price war unequivocally started this weekend” [..] analysts are predicting that oil could tumble to a nadir of $20 a barrel. The downturn for oil also comes amid the outbreak of COVID-19 the infectious disease that has sickened nearly 110,000 people worldwide and killed more than 3,600. The epidemic, derived from a novel strain of coronavirus, significantly dented oil prices because China is one of the biggest importers of the commodity, but worries about a global slowdown to economies and supply chains due to attempts to contain the virus also have hammered crude.

“The prognosis for the oil market is even more dire than in November 2014 when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus.” the Goldman analysts wrote.

Bloomberg: S&P 500 futures suffered one of their biggest spasms yet on Sunday night, extending a slide that left the March contract within 4% of completing the 20% tumble that traditionally denotes a bear market. In fact, it could be closer than that. The overnight sell-off triggered exchange circuit breakers that limit losses in futures to 5%. An exchange-traded fund tracking the S&P 500 that isn’t subject to those curbs was changing hands 17.5% below its Feb. 20 high, about an hour into the premarket session.

Should a 20% decline be completed before April 1, it’d mark the fastest slump into a bear market from a record high. During the 1929 Great Depression, it took 42 days to kill the bull.

According to reports, Russia and Saudi Arabia are likely to significantly up oil production, hence further putting the price of oil under stress, lowering it.

CNN: US oil prices crashed as much as 34% to a four-year low of $27.34 a barrel as traders brace for Saudi Arabia to flood the market with crude in a bid to recapture market share.

A similar situation of more oil available than demanded, happened before, in the 1980s, called the oil glut.

The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s energy crisis. The world price of oil had peaked in 1980 at over US$35 per barrel (equivalent to $109 per barrel in 2008 dollars, when adjusted for inflation); it fell in 1986 from $27 to below $10 ($63 to $23 in 2008 dollars). The glut began in the early 1980s as a result of slowed economic activity in industrial countries. 

After 1980, reduced demand and increased production produced a glut on the world market. The result was a six-year decline in the price of oil, which reduced the price by half in 1986 alone. [..] The Soviet Union had become a major oil producer before the glut. The drop of oil prices contributed to the nation’s final collapse.

The Upside

While cheaper oil is good for oil consumers, it makes revenue from oil producers less lucrative, same for stock market investors. Because the world already moves to cleaner technologies investors have now a real reason to adjust their portfolio, which in turn provides more financial support to ramp up electric car manufacturing, construction of solar panels, or wind farms.

Because the coronavirus situation affecting markets, demand, will very likely last throughout the year, oil company evaluations are now in the process of adjustments, and may even last in light of technology upgrades.

Bottom line, this crash may even turn out to be the start of the end of the oil era. At least it shows how extreme volatile markets can perform, and hints at future crashes in regards to stranded assets, with the continued investments, in what is essentially for society, destructiveness.

Related

Jim Cramer says he could see ‘9 or 10’ oil companies going bankrupt if crude declines persist https://www.cnbc.com/2020/03/09/cramer-9-or-10-oil-companies-may-go-bankrupt-amid-crude-declines.html

The Great U.S. Shale Decline Has Already Begun https://oilprice.com/Energy/Energy-General/The-Great-US-Shale-Decline-Has-Already-Begun.html